GT Alert

Modifications to the United States Bankruptcy Code Affecting Commercial
Real Estate Transactions

Several modifications to the United States Bankruptcy Code set forth
in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the
“Act”) will directly impact owners, lenders and others involved with
commercial real estate assets that become involved in bankruptcy cases commenced
on and after October 17, 2005.

Limitations on Extension of Time for Assumption or Rejection

An unexpired lease of nonresidential real estate under which the debtor
is the lessee will automatically be deemed “rejected” under the Bankruptcy
Code if a debtor fails to file a motion to either assume or reject the lease
within the earlier of: (i) 120 days after commencing its Chapter 11 case,
and (ii) the date of entry of a confirmation order. 11 U.S.C. § 365(d)(4)(A).
The Bankruptcy Court may extend this 120-day period for no more than 90
additional days upon a showing of “cause.” 11 U.S.C. § 365(d)(4)(B)(i).
Further extensions of this period are permitted only upon the prior written
consent of the lessor. 11 U.S.C. § 365(d)(4)(B)(ii). This is a significant
change from current law and will materially complicate parties’ planning
and action – particularly in retail matters and other businesses with multiple
leased locations.

Recovery of Administrative Claim

In the event that a debtor assumes a nonresidential real property lease
and subsequently rejects it, the Act limits the administrative priority
for the claim arising from such rejection to all monetary obligations (other
than those arising from or related to a “failure to operate” or a “penalty
provision”) due under the lease for the two years following the later of
(i) the rejection date or (ii) the date of actual turnover of the leased
premises, “without reduction or setoff for any reason whatsoever except
for sums actually received or to be received from an entity other than the
debtor…” Any sums remaining due under the terms of the lease are treated
as a general unsecured claim subject to the Section 502(b)(6) cap. 11 U.S.C.
§ 503(b)(7). This change may make it feasible for a Chapter 11 debtor to
assume a commercial lease and later reject the same lease knowing that rejection
damages for the previously assumed lease will be capped – a significant
change that may increase uncertainty for lessors/owners/ lenders in certain
situations.

Necessity of Curing Nonmonetary Defaults

The Act now provides that a debtor is not required to cure a nonmonetary
default in order to assume an executory contract or unexpired lease if it
is impossible to do so by “performing nonmonetary acts at and after the
time of assumption.” 11 U.S.C. § 365(b)(1)(A). However, a nonmonetary default
arising from “a failure to operate in accordance with a nonresidential real
property lease” must be cured by “performance at, and after, the time of
assumption” and the lessor must be compensated for any pecuniary losses
resulting from any such default. 11 U.S.C. § 365(b)(1)(A). These provisions
remove the previous uncertainty related to nonmonetary defaults.

Clarification of “Anti-Assignment Provision”

With the addition of a few simple words, the Act now makes clear that
Section 365(f)(1), commonly known as the “anti-assignment provision,” is
subject to the provisions of Section 365(b), which state, among other
things, that in order to assume a lease the debtor must provide “adequate
assurance of future performance.” 11 U.S.C. § 365(b)(1). This has particular
application in connection with shopping center leases as Sections 365(b)(3)(A)-(D)
provide: “[A]dequate assurance of future performance of a lease of real
property in a shopping center includes, [among other things,] …assurance
that the assumption or assignment of such lease is subject to all the provisions
thereof, including (but not limited to) provisions such as radius, location,
use, or exclusivity provision …and that assumption or assignment of such
lease will not disrupt any tenant mix or balance in such shopping center.”
11 U.S.C. § 365(b)(3)(A)-(D).

This Alert was written by
Richard S. Miller,
Maria J. DiConza and
David Wolnerman in the New York office. Please contact Mr. Miller, Ms. DiConza
or Mr. Wolnerman at 212.801.9200 or any other member of the GT Business
Reorganization & Bankruptcy Group to address issues as they arise or if
you would like to discuss any insolvency, bankruptcy or restructuring issues
raised by the Act or otherwise.

This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.